CONSTRUCTION ISSUES SERIES: AIA CONTRACTS MISSING CLAUSE

In the construction industry, it is critical to carefully consider the language of every contract that you sign. Failing to do so, or neglecting to get legal counsel to help you do so, could cost you a lot of money. This is true even when you are using AIA contracts.

For instance, the all-important indemnification provision of AIA contract number A105TM-2007 states: “the Contractor shall indemnify and hold harmless the Owner . . . from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work . . . to the extent caused by the negligent acts or omissions of the Contractor. . . .”

This provision has one glaring omission that could affect you substantially—the right to “defend.” This critical right should be part of your contract, and here’s why:

Indemnification means that you will fully compensate and legally shield your client for any injuries or damages that your client sustains on account of your work. Clients want to guard themselves as much as possible from cost increases or liability resulting from your negligence. As a result, clients may demand a broad indemnification and you are, in effect, guaranteeing that your work is excellent. Indemnifications get triggered from damages (including property loss) and from lawsuits (from third parties who have been impacted or injured). Lawsuit costs include compensation required by settlement or judgment, as well as attorneys’ fees.

If your contract says that you will “defend” your client, then you have agreed to become involved once you are notified that a lawsuit has been filed against your client implicating your negligence. From the start, you will be responsible for hiring counsel and stepping into the “defendant” role. Under the AIA indemnification which does not include “defending,” your responsibility is limited to paying the costs of any settlement or judgment, as well as the attorneys’ fees for the litigation.

The advantage of agreeing to “defend” is that you are in charge of your own fate. You hire an attorney whom you trust, you make the decisions that arise, you strategize with your attorney, and you consider costs and benefits at each stage. By contrast, under the AIA language, you are obligated to pay the bills, including attorneys’ fees. But, since you are not actively defending the case, you are effectively writing your angry client a blank check.

The AIA approach here is short-sighted. Our approach, on the other hand, recognizes that agreeing now to take the lead and to use your good judgment in a difficult situation could save you a lot of money in the future.

The attorneys at the Bachman Law Firm understand your business and formulate creative legal solutions to enable you to reach and exceed your goals. You can reach us at 845-639-3210 or Judith@thebachmanlawfirm.com.